Overriding Factor: To Profit Eventually Making Money Should Be In Mind When Investing In Write-offs

April 14, 1986|By John F. Persinos of The Sentinel Staff

Mortgage-interest deductions and individual retirement accounts are among the few types of tax shelters that ordinary investors understand, let alone put money in. But many tax shelters provide basic, time-honored ways to save money on taxes.

Typically, tax shelters are structured as ''limited partnerships,'' agreements under which a number of investors put money into a venture and set a limit as to how much money they will put at risk. The partnership serves as a ''tax shelter'' when the venture incurs early losses. Those losses that qualify are then used as tax deductions against other sources of income.

Limited partnerships are offered to the public through syndicators, mostly brokerage houses or financial planners.

Real estate investment is one of the most popular forms of tax shelter. An investor in property, for example, can take write-offs for accelerated depreciation, which is the declining worth of a physical asset in its early years.

''After a client has invested in an IRA and other basic stuff, I tell him to buy something directly, like an apartment house,'' said Atlee Harmon, partner in charge of the tax department at the Orlando office of Peat, Marwick, Mitchell & Co., a Big 8 accounting firm based in New York City.

But investing in any tax shelter is problematical this year because of the need to weigh tax-reform proposals being debated on Capitol Hill. Last December, the U.S. House Ways and Means Committee passed the most sweeping change of the federal tax code in more than 70 years. The bill is now before the Senate and, in the end, must be reconciled with President Reagan's own tax plan.

Despite those uncertainties, many of the bill's proposals affecting tax shelters are likely to become law.

Congressional tax writers, for example, voted to prohibit investors in real estate tax-shelter partnerships from deducting more than the amount they are at risk of losing. Currently, real estate investors aren't subject to these ''at-risk'' rules.

Nevertheless, real estate tax shelters still are attractive right now because existing tax benefits probably will be ''grandfathered,'' meaning preserved.

Vacation property will probably remain an effective shelter as well. Under heavy pressure from the real estate lobby, the House committee preserved full deductions for mortgage-interest payments on second homes. In addition, full deductibility was allowed for interest payments on loans to acquire as much as six weeks in a time-share property. Mortgage interest for principal residences would remain fully deductible.

Ambrico cautioned, however, that other types of tax shelters will become much riskier. To rein in tax-shelter partnerships as a whole, the committee decided to limit the amount that can be deducted from taxes for interest paid on money borrowed.

''Everyone's going to have to be much more careful when thinking about getting into tax shelters in general,'' he said. ''My rule of thumb for any type of tax shelter is this: Does it make economic sense? The first thing an investor should look for is the probability of eventually making a decent profit from it. The tax benefits should be of secondary consideration. People who do it the other way around can go broke. The overriding factor should be profit.''

Garden-variety shelters include the 401(k) plan, a tax-deferred savings plan run by an employer, and the IRA. Today, many people invest in both -- a practice known as ''double-dipping.'' But one controversial provision of the House committee bill would require anyone with a 401(k) plan to deduct from his IRA any contributions to his 401(k).

Ambrico said such a change would make it advantageous for people to put all of their retirement money into the 401(k). When employees participate in a 401(k), an employer gives a matching contribution of a certain percentage that is tax-deferred. But, said Ambrico, ''people should be wary now because that tax deferral could be removed.''

A classic tax shelter is the oil and gas partnership. A group of people invest money in an oil venture, and figure out the drilling costs before they start production. Those costs qualify as tax write-offs. Most new wells generate substantial losses in the first few years before turning a profit.

But, warned Ambrico, oil and gas is not a wise investment in the face of the current oil glut. ''It doesn't make too much sense right now,'' he said. ''The price of oil is too low. If it gets any lower, it could become unprofitable in some cases to get it out of the ground. Remember: An investor doesn't want just write-offs and no future income.''